Official Cites Risks of Fannie, Freddie

Fannie Mae and Freddie Mac, which own or guarantee 42% of all U.S. home mortgages, may lack adequate capital to weather a disruption in financial markets, St. Louis Federal Reserve President William Poole said.

The two government-chartered companies “hold capital far below that required of regulated banking institutions,” Poole said at an Office of Federal Housing Enterprise Oversight symposium.

“Should either firm be rocked by a mistake or by an unforecastable shock, in the absence of robust contingency arrangements the result could be a crisis in U.S. financial markets,” he said.

Shares of Fannie Mae and Freddie Mac tumbled as Poole suggested severing the government’s implied backing of the companies. Fannie Mae plunged $4.35 to $58.93, its biggest decline since October 1998. Freddie Mac declined $3.20 to $50.80. Both trade on the New York Stock Exchange.

Poole’s comments echoed criticism leveled against Fannie Mae and Freddie Mac by competitors such as Wells Fargo & Co. and by Rep. Richard H. Baker (R-La.), chairman of the House subcommittee on capital markets. They have said the companies use their government ties to boost borrowings to levels that could pose a risk to taxpayers. Fannie Mae and Freddie Mac own or guarantee $3.1 trillion of mortgages.

The government should eliminate the Treasury’s authority to buy $2.25 billion of the companies’ debt to remove any implied sponsorship and appearances to investors that the U.S. would bail out the firms in times of trouble, Poole said.

Fannie Mae and Freddie Mac countered that their capital standards are more stringent than those required of banks.

Fannie Mae said Poole’s speech suggests he “does not understand” the company’s capital structure.

Poole said that though both entities use models to measure the quantifiable risks of changes in credit quality and interest rates, the danger resides in non-quantifiable risks and “unpredicted crises,” which, he said, occur far more often than is recognized.